Mortgage Life Insurance

For most people, the monthly mortgage payment represents a significant portion of their monthly cash flow. What could be more traumatic than having to face losing one’s home in addition to losing a beloved family member? Without mortgage life insurance, that situation is all too common.

Many individuals find themselves in the unfortunate situation of having to sell or facing foreclosure following the death of a family member. You can make sure that your family will never have to deal with this type of trauma simply by adding a mortgage life insurance policy (mortgage protection life insurance) to your portfolio of coverage.

What is Mortgage Life Insurance?

Mortgage Life Insurance which is also referred to as mortgage protection insurance is a life insurance policy designed to pay off your existing mortgage if you were to die unexpectedly.

Certainly, most breadwinners in a household carry life insurance but they generally do not consider their mortgage balance at the time they apply for life insurance. Many of us purchase life insurance when we’re young and are renting or we get our life insurance through our employer which is generally not sufficient to cover all of our insurance needs.

Having a life insurance policy specifically to pay off your mortgage makes financial sense for the following reasons:

Since most people use term insurance, the cost of insurance is very affordable.

Since your mortgage is a temporary debt, it makes good financial sense to use temporary insurance.

Most companies offer a handful of riders that can be used to broaden your coverage and add living benefits to your policy.

Affordable Mortgage Life Insurance Options

There are several different ways to make sure that your family won’t have to struggle with making mortgage payments or face foreclosure in the event that something happens to you. There are several different types of life insurance that work well as mortgage life insurance but the best and most affordable type of life insurance for this purpose is term life insurance and return of premium term life insurance.

When the mortgage life insurance concept was first introduced, most agents recommended using Decreasing Term life insurance because your death benefit would decrease each year as your mortgage balance went down.

However, as term insurance became very competitive and so affordable, decreasing term policies fell by the wayside because the savings between decreasing term and level term was not enough to make it a viable option.

Mortgage Life Insurance using Level Term

Most people now opt for traditional level term life insurance policies that coincide with their mortgage loan repayment schedule. With this type of policy, coverage remains in effect until the policy’s term is complete. At the end of the term, coverage simply expires.

It’s also important to note that the insurance coverage follows the insured person, not the mortgage that the insurance is purchased to cover. This means if you have a $500,000 thirty-year term policy to cover your mortgage and then move to a more expensive home, you can simply purchase additional term insurance to make up the difference in mortgage amounts.

Here are actual term insurance rates for a healthy male and female non-smoker with a 30-year mortgage of $500,000:

Age of Applicant

Male Non-Smoker

Female Non-Smoker

30

$31.10

$25.79

35

$34.93

$29.49

40

$47.37

$38.80

45

$72.67

$56.06

50

$116.34

$86.03

Return of Premium Mortgage Life Insurance

Many people choose return of premium life insurance rather than traditional term life insurance options when putting mortgage protection insurance in place. This type of insurance has higher premiums than term coverage but offers a distinct advantage.

With a return of premium policy, if the policy stays in force throughout the term, premiums you paid in are returned. This doesn’t mean you must outlive your mortgage, it means you must outlive your term insurance policy that was purchased to pay off a mortgage.

Paying off one’s mortgage in the event of death is usually the primary reason people purchase life insurance today. With lower term life premiums and the introduction of return of premium term life insurance, consumers now have several choices of mortgage protection.

Broaden your Mortgage Life Insurance through Riders

If you want more out of your insurance policy than just the death benefit, most companies offer a host of optional riders that can be added to your mortgage protection insurance to broaden your coverage and add living benefits. Depending on the company you choose, you’ll have the following riders to choose from:

Accidental Death Benefit – This rider provides for the insurer to pay a higher death benefit if the cause of your death is the result of an accident.

Guaranteed Insurability Rider – The Guaranteed Insurability Rider allows the insured to increase their insurance coverage at a later date without having to prove insurability (no medical exam). This is a logical rider to purchase since most homeowners live in a home about 7 years on average and then sell and move into a larger home to accommodate a growing family.

Accelerated Death Benefit – This rider adds living benefits to your term insurance policy. If the insured is diagnosed with a covered critical or terminal illness that will considerably reduce your lifespan, the insurance company will advance the policyholder a significant portion of the death benefit to deal with medical costs.

Disability Income Rider – This valuable rider also adds living benefits to your mortgage life insurance. The rider provides for the insurer to pay a monthly benefit to the insured if he or she becomes disabled and can no longer work. Some carriers will also waive the premium payment during your disability.

Long-Term Care Rider – In the event the insured has to stay at a nursing home or receive home care on a long-term basis, this rider offers monthly payments while the insured is being cared for.

Return of Premium Rider – As previously discussed, this rider provides for the insurance company to return a lump-sum payment to the insured who outlives the insurance policy. This return of premium is tax-free and can be reinvested or spent however the insured wishes.

Frequently asked Questions

What happens when the death benefit is more than the mortgage?If the insured dies during the policy term the full death benefit will be paid to the beneficiary no matter the balance on the mortgage.

Does mortgage term insurance have a conversion option?Depending on the company you select, most term policies have a conversion option that allows you to convert your term policy to a permanent policy without a medical exam requirement.

Should a husband and spouse purchase mortgage life insurance?If your family relies on the income of both spouses to pay the mortgage payment, both spouses should definitely purchase mortgage life insurance.

How much more is return of premium mortgage life insurance?The additional premium charged for the return of premium option depends on the age of the applicant and the amount of insurance purchased. Typically it will cost an additional 25% to 40%.

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